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Evolving Roles for Fixed Income ETFs Research Report

Our new fixed income investment research reveals four trends that highlight the ever more important role exchange traded funds (ETFs) play in an evolving fixed income landscape, helping investors to build fixed income portfolios, meet liquidity needs, support the shift to in-house management, and implement ESG objectives.

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ETFs’ Role in Portfolio Construction

Investors are using ETFs to expand into non-core sectors. AUM has more than doubled in the past five years, and the increased number of funds means investors have more options for precise exposures.

Investors Are Turning to ETFs to Build Core and Satellite Allocations

Source: State Street Global Advisors, May 2022. Chart shows percentage for somewhat/very likely to use ETFs. n=700.

62%

of investors who are increasing exposure to high-yield corporate credit say they’re likely to use ETFs to do so.

$1.28 T

assets under management (AUM) in fixed income ETFs.¹

$32.7 B

net flows into active bond ETFs globally in 2021, the largest on record.²

Meeting Liquidity Needs with ETFs

Increasing portfolio liquidity is a top concern across survey respondents, and they’re deploying a range of strategies to manage liquidity risks — including the use of fixed income ETFs.

ETFs Play a Critical Role in Maintaining Liquidity Profiles

48%

of global asset owners respondents said increasing portfolio liquidity is a top priority.

41%

of respondents are increasing allocations to ETFs to manage increased liquidity risks.

Using ETFs for In-House Management

Survey respondents, particularly asset owners, are building in-house investment teams to improve efficiencies in fixed income portfolios. Lower-cost ETFs can help, given the pressure investors face to make better use of fee budgets.

Active and Index ETFs Rank High For Asset Owners as Internal Fixed Income Management Tools

46%

of survey respondents agreed that they were under pressure to make more efficient use of fee budgets.

64%

of the largest asset owners are bringing part of their portfolio management in-house.

59%

view active ETFs as a highly important approach for building exposures in-house.

Implementing ESG Objectives

Investors say ensuring fixed income portfolios take ESG issues into account is a top priority. And asset managers, especially, see ETFs as highly important tools for pursuing ESG objectives.

Investors See Index ETFs As Important ESG Integration Tools

47%

asset managers have put top priority on ensuring their fixed income strategies meet ESG threshold criteria.

46%

of survey respondents plan to implement Paris-aligned benchmarks.

51%

asset managers see ESG ETFs as highly important tools for ESG integration.

Dig Deeper

For additional institutional insights into our findings and a comprehensive review of what they could mean for fixed income portfolios everywhere, dig more into our analysis.

About the Survey

State Street conducted a survey of 700 institutional investors in 2022. Global survey respondents came from pension funds, wealth managers, asset managers, endowments, foundations and sovereign wealth funds. Their responses reveal how exchange traded funds (ETFs) are an increasingly important tool in the evolving fixed income landscape.

Demographic Breakdown

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Footnotes

Disclosures

In partnership with FT Longitude, a Financial Times company. This survey was conducted in May of 2022 via an online survey instrument (n=700) and telephone interviews (n=5). Respondents were limited to senior leaders and senior portfolio managers who are directly involved in fixed income portfolio construction and investment decisions at pension funds, wealth managers, asset managers, endowments, foundations and sovereign wealth funds.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.

Investing in high yield fixed income securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.

The returns on a portfolio of securities which exclude companies that do not meet the portfolio’s specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio’s ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.

The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.

Investing involves risk, including the risk of loss of principal.

The whole or any part of this work may not be reproduced, copied, or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied upon as such.